What Are Bonus Shares?

Have you ever received a pleasant surprise from a company you've invested in in the form of bonus shares of the unlisted companies? If you need to become more familiar with the concept, let's dive into unlisted bonus shares and explore what they mean for shareholders and why companies issue them. Upon finishing this article, you'll gain a more profound comprehension of this distinct facet of the financial realm.

What Are Unlisted Bonus Shares?

Unlisted bonus shares, also referred to as "scrip dividends," represent extra shares allocated to current shareholders of an unlisted company without any additional charges. The number of bonus shares a shareholder receives is usually determined by the number of shares they already hold in the company. Unlisted Bonus shares are a reward, representing the company's accumulated earnings converted into free shares rather than distributing those earnings as dividends.

Why Do Unlisted Companies Issue Bonus Shares?

Unlisted Bonus shares serve several purposes for companies:

• Encouraging Retail Participation: Companies issue unlisted bonus shares to promote greater retail involvement among shareholders. By offering these unlisted shares as a bonus, they make it more accessible for existing shareholders to increase their stake in the company, fostering a sense of ownership and loyalty.

• Strengthening Equity Base: Companies use bonus shares to bolster their equity base. This process helps balance the company's share capital and reserves. It ensures that the company's financial structure remains robust.

• Adjusting Share Prices: At times, the market value of a company's shares surges to a point where it becomes difficult for new investors to join the market. Bonus shares effectively decrease the per-share price, making it more affordable for newcomers. However, the total capital remains unchanged even after the issuance of bonus shares.

From an investor's perspective, bonus shares offer several advantages:

• Tax Benefits: When investors receive bonus shares from the company, they are not required to pay any taxes on them. This makes bonus shares a tax-efficient way to grow your investment.

• Long-Term Growth: Bonus shares are particularly advantageous for shareholders with a long investment horizon. They can steadily increase their investment in the company over time, potentially reaping the benefits of compounding returns.

• Enhanced Liquidity: Bonus shares are accessible to shareholders since the company distributes them. This increases an investor's outstanding shares and, in turn, enhances the stock's liquidity, making it easier to buy and sell.

• Building Trust: Bonus shares help build trust between investors and the company. It's a gesture that demonstrates the company's commitment to its shareholders and confidence in its business operations.

Types of Bonus Shares:

There are two main types of bonus shares:

1. Fully Paid-Up Bonus Shares:

Fully paid-up bonus shares are distributed to shareholders at no additional expense based on their current stake in the company. These bonus shares are sourced from various accounts, such as the Profit and Loss statement, Reserves for Capital Redemption, and Accounts for Premium Security.

2. Partly Paid-Up Bonus Shares:

Conversely, partly paid-up bonus shares enable shareholders to acquire shares without covering the complete issuance cost. The remaining amount for these partially paid shares can be paid in installments as and when the company makes calls for payment.

Partly paid-up bonus shares are created when bonus shares are applied to partially paid shares and converted into fully paid-up shares through profit capitalization. However, it's essential to emphasize that they cannot be issued through a Capital Redemption Reserve or Security account, as is the practice with fully paid-up bonus shares.

In conclusion, bonus shares are a unique and rewarding aspect of investing in unlisted companies. Unlisted bonus shares provide tax advantages and long-term growth potential for investors while also serving as a potent instrument for companies to interact with their shareholders and enhance their financial standing.

So, the next time you receive bonus shares from a company you've invested in, you'll know that it's more than just a financial transaction; it's a gesture of trust, loyalty, and the potential for your investments to grow over time.

Bonus shares are a win-win for both companies and investors, fostering a solid and enduring partnership in finance.